Here's What To Make Of ShenZhen YUTO Packaging Technology's (SZSE:002831) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of ShenZhen YUTO Packaging Technology (SZSE:002831) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ShenZhen YUTO Packaging Technology is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = CN¥1.8b ÷ (CN¥21b - CN¥8.8b) (Based on the trailing twelve months to September 2023).

Therefore, ShenZhen YUTO Packaging Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 4.4% it's much better.

View our latest analysis for ShenZhen YUTO Packaging Technology

Above you can see how the current ROCE for ShenZhen YUTO Packaging Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ShenZhen YUTO Packaging Technology .

What Does the ROCE Trend For ShenZhen YUTO Packaging Technology Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 88% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, ShenZhen YUTO Packaging Technology has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On ShenZhen YUTO Packaging Technology's ROCE

In the end, ShenZhen YUTO Packaging Technology has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 30% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

ShenZhen YUTO Packaging Technology does have some risks though, and we've spotted 1 warning sign for ShenZhen YUTO Packaging Technology that you might be interested in.

While ShenZhen YUTO Packaging Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.